Mock trading was conducted on Saturday to meet the deadline to start pre-trade verification system schedule to start from Monday. This step was agreed upon following the meeting of stockbrokers with government officials last month to raise the financing limit.
The objective of pre-trade verification system is to ensure that at any point in time, members have timely, relevant and reliable information so as to allow the KSE management to monitor members' exposure on real time basis.
The system is being designed under the supervision of KSE Board. For this purpose, it is known as 'Exposure Monitoring System' (EMS). The system would accept, or reject, order entry in the system on the basis of members' exposure calculations.
The following is what the Notice No KSE/N - 4389 dated August 3, 2005 of the KSE had to say about members' exposure limit:
i) If at any time during a clearing period the exposure of a Member exceeds the limit prescribed for the purpose, such Member shall deposit with the Clearing House the amount computed in accordance with the prescribed rates within the time specified by the Board, which shall not exceed 24 hours in any case. Any short deposit will be called for and any surplus deposit will be released to the concerned member by the Exchange.
ii) In case a Member sustains loss during any particular clearing period, in excess of the limit prescribed for this purpose, such Member shall deposit with the Clearing House the amount of such loss within the time specified by the Board in the notice, but shall not exceed 24 hours in any case. Profit and loss arising due to margin finance transactions shall be treated/adjusted in similar manner in which the normal profit and loss on the exchange transactions is treated/adjusted.
iii) No Member shall have outstanding transactions in his account of more than the prescribed percentage of the number of the issued shares of particular scrip in a particular clearing period.
Deposit may be given either in cash or in the form of readily realisable securities, as may be prescribed.
Graduating from post-trade verification to pre-trade verification - KSE shifting to effective risk management measures: "It is pertinent to note that the current system in place is based on the concept of post-trade verification system," said Hasnain Ahmad, research analyst at Arif Habib Securities. It is a system where both Capital Adequacy Requirements of members and the process of collection and maintaining of their deposits and exposures against losses are carried out on post-trade basis.
In the new pre-trade verification system, however, the following basic change would take place:
"The new pre-trade verification system would ensure that on a real time basis, members' capital adequacy requirements are met; deposits against exposure are kept and mark to market is done on daily basis."
Explaining the mechanics of the new and old trade verification system:
As we have already pointed out, the existing trade verification mechanism is one that entails a post-trade verification system and is based on exposure limits and payable deposits. The system assesses members' demand on the basis of their unsettled business, while offsetting deposited cash and securities with the KSE.
Now, with a pre-trade verification system in place, the member will be required to maintain enough deposits so as to prevent his orders from rejection. It is worth remembering that the new pre-trade verification system shall allow the member's ability to trade based only on the valued deposit ranges against the conventional exposure limits.
THE PROCESS OF PRE-TRADE VERIFICATION SYSTEM: THE FOLLOWING ARE THE IMPORTANT POINTS IN THIS REGARD:
-- The Capital Adequacy shall be the first trading parameter that would be checked by the EMS at the order level.
-- The executed/outstanding business of the members shall be the applicable amount in this regard that would be compared with the Capital Adequacy ceiling.
-- The system shall not book margin calls for squaring up order of filed quantities in the same scrip.
-- At the order level, the system shall decide whether the relevant queued order will oppose/net-off the executed business in the similar scrip and in case of an affirmative situation, margins shall not be accounted for on such orders to the extent of the opposite side of the business. The system shall also not book contingent orders even on orders to the extent of opposite side of the business.
"We welcome this system and believe it would have a healthy impact on risk management measures at the bourses," Ahmad said.